What should businesses do if they start growing too quickly?

The first question dealt with the risk that a business may be growing too quickly. Mr. Peinhardt quipped: “If your business is growing too fast, rule number one is raise your prices.”

What risks are top of mind for boards of directors?

Next, Mr. Dominick asked Mr. Peinhardt what risks are top of mind for boards of directors. Mr. Peinhardt said risk associated with disruptive technologies are getting increased attention in board rooms.

Disruptive technology can be loosely defined as an innovation that displaces an established technology or industry. Mr. Peinhardt explained that disruptive technologies often emerge from a lower-margin product targeting a niche market.

Established businesses are caught off guard by disruptive technology because conventional business thinking is to seek the highest margin opportunities and the largest markets. They essentially ignore lower margin products in niche markets until it’s too late. Eventually, the lower margin product gains traction, grows exponentially, and displaces traditional products.

The Solution

Boards are starting to employ strategies where they have teams or committees who monitor industry activity for potential disruption. We can use General Motors (GM) as an example: they have a task force responsible for actively monitoring their potentially disruptive competitor, Tesla.

That team is looking for information or trends that can help GM predict what changes Tesla might introduce to the market, so they can be ready to adapt as needed.

In many industries it’s more important than ever to pay attention to potentially disruptive technologies.

How can boards of directors adapt to shifting risks?

Next, Mr. Dominick asked the panel about how to adapt to shifting risks.

Mr. Peinhardt said that with truly disruptive technologies, those that have overturned entire industries, it has historically been very difficult for established businesses to adapt quickly enough. Established businesses have firmly embedded processes, culture, and politics that rarely translate well to the processes, culture, and politics required of a disruptive technology.

Therefore, in many cases it’s more effective to partner with an incumbent, or to establish an entirely separate entity with the appropriate business model for the disruptive technology.

How much risk comes from reliance on third-party vendors?

This is an area where Mr. Peinhardt has unique insights from the perspective of a vendor serving some of the most security-conscious organizations in the world.

Mr. Peinhardt said there are approximately 10,000 cloud-based SaaS technology companies in the US, and the vast majority are sub $3 million revenue. There is a lot of exciting technology being brought to market, and that from his perspective the financial industry, in particular, does a very good job of assuring that vendors adhere to rigorous security standards. If a vendor is working with more than a handful of banks, they must take security very seriously.

Mr. Peinhardt recounted that Directorpoint began participating in rigorous SOC audits and 3rd party security testing at a very early stage; at the time with less than 10 employees and well below $3 million revenue.

He said the good news is that when you learn about exciting new products, like Directorpoint, as long as the vendor is already working with a number of financial institutions, even if they’re small, you’ll likely be surprised at how rigorous the security practices are.

This panel took place at BankDirector’s 2018 FinXTech conference on Thursday, May 10, 4:00 – 4:45 PM.Frameworks to Assess Risks & Opportunities